Gold Plated Pensions – A Blessing Or A Curse?

saving for retirement

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This guest post was written by Robb Engen, who blogs about Canadian personal finance at Boomer & Echo. Together with his mom, (she’s the Boomer, he’s the Echo) they offer their own unique perspectives on saving, investing and personal finance. Add Boomer & Echo to your RSS reader today!

Did you know that the average person will stay in the same job for less than 5 years? This means that you will likely have at least 6 to 10 different jobs throughout your entire working life.

For the 29% of Canadian workers who currently contribute to a defined benefit pension plan, this presents a bit of a challenge, especially for younger employees.

The Golden Retirement Plan

A gold-plated pension has been seen as a blessing for Canadian workers for decades, but these pension plans are now hard to come by outside of the public sector. Employees lucky enough to have such a plan were thought to be set for life in retirement.

The basics of the defined benefit plan look something like this:

  • Employee contributes a certain percentage of their salary towards the public or company pension plan
  • Employer matches that contribution
  • As your salary increases throughout your career, contributions continue to grow
  • Employees max out their pensionable service when they reach the magic number of 85 (age + years of service)

The retirement benefits will vary depending on the type of plan offered by the employer, but a typical defined benefit pension formula can look like this:

2.0% x Years of Service x Best 5 Year Average Salary

Using real numbers, if you were hired by your employer at the age of 25 and worked there for 30 years with your best 5-year average salary of $100,000, your annual pension income would be $60,000.

Set For Life, Or Life Sentence?

As a young worker, there is one number that stands out above all the others. 30 years with the same employer? In order to maximize your defined benefit pension retirement benefits, you need to be in it for the long haul.

That seems almost inconceivable for this generation of employees who fall in and out of love with their jobs faster than Apple updates the iPhone.

I’ve witnessed firsthand the complacency that sets in amongst many public sector employees who do the least amount of work possible in order to collect their paycheque every two weeks until they finally reach that magic number where they can retire and receive their gold-plated pension.

Is that any way to live your life? If complacency is setting in after just 5 or 10 years with the same organization, how in the world are you going to make it for 25+ years? Young workers definitely have to consider this when choosing their long-term careers.

Leaving The Pension Plan Before Retirement

If you leave the pension plan before your normal retirement date, your eligibility for benefits depends on the length of your pensionable service and your age.

There are three options for those leaving a company with a vested pension:

  1. Leave the funds in the plan and collect the pension benefits at the time of retirement.
  2. Transfer the funds to a new pension plan, if the new pension plan allows this.
  3. Transfer the amount into a locked-in RRSP or LIRA. A LIRA is similar to a regular RRSP except withdrawals are not allowed until the employee reaches retirement age.

Are You Better Off Investing On Your Own?

My defined benefit contributions make up more than 11% of my salary, leaving me with little opportunity to create my own investment portfolio. Directing all of your savings towards retirement when you’re young may help build up a sizeable nest egg, but is it in your best interest?

With an RRSP you can use the Home Buyers Plan to withdraw money for a down payment on a house, or use the Lifelong Learning Plan to upgrade your education. And with the Tax-Free Savings Account, you can withdraw money at any time, tax-free! These investing options give you a lot more flexibility compared with the rigidly defined benefit pension plan. It’s also worth noting that today’s fintech investing platforms make investing on your own cheaper and easier than ever before. If you’re looking for a TFSA or RRSP solution that you can “set-and-forget” then Canada’s robo advisors offer the best path. See our Wealthsimple review for the quickest possible way to take a piece of your paycheque and convert it over to an investment portfolio (we ranked it a 4.9 out of 5). On the other hand, if you’re looking for the investment strategy that cuts fees to the absolute bone in Canada, then you’re going to want to take a look at our Questrade review where we detail exactly how to use their no-fee ETFs to build yourself a couch potato portfolio that will maximize your nest egg over the long haul. If you’re going to use a discount brokerage such as Questrade or Virtual Brokers, then you’ll need to do a little more math (and it’s a little more paperwork upfront) than going the robo advisor route, but considering that fees are one of the only things that investors can really control, it’s certainly worth your time to figure out which options work best for you!

Changing The Way We View Pensions

There was a time when landing a job with a defined benefit pension plan right out of University was considered a ticket to a golden retirement. Employees were loyal to their employers and in turn expected to be taken care of when they retired.

But Generation Y doesn’t envision working for the same employer for their entire careers. They want to take time to find their passion, reach outside their comfort zone, or maybe start their own business. They want the ability to invest their own money and choose their own retirement date.

Readers: What’s your take on the gold-plated pension known as the DBP? Is it a blessing or a curse for the young generation?

Robb Engen

Robb Engen

Robb Engen is a leading personal finance expert in Canada and the co-founder of Boomer & Echo, an award-winning personal finance blog. He writes a monthly column in the Toronto Star’s Smart Money section and is a fee-only advisor who helps Canadians at different ages and stages get their finances on track and prepare for retirement.

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